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Alan's Thinking Cap | Q3 2023 Capital Markets Update

Oct 24, 2023

Finally, the IPO market has begun to show signs of coming back to life. Maybe we will see more VC- backed companies begin to think about listing their shares in the next several quarters. Will a few successful IPOs get the VC industry back on track in terms of dollars invested? Valuations continue to trend downward at all stages, including recently announced IPOs. When will valuations hit the bottom and start to rebound? 
In this webinar, Artem Trotsyuk, Ph.D, Partner at LongeVC and EisnerAmper Managing Director of Capital Markets Alan Wink gave a 30-minute Q3 2023 capital markets update covering key market trends and an analysis of investment strategies and emerging opportunities.


Alan Wink:Good day everybody, and thank you Bella for the opening comments. As Bella mentioned, my name is Alan Wink, I'm the Managing Director of Capital Markets at EisnerAmper, and we're here to review the third quarter of 2023 in terms of venture capital activity. I'm glad to have with me today, Artem Trotsyuk, who's a partner with LongeVC, actually based on the West Coast. We're going to have a West Coast perspective on the state of the VC market.

Good afternoon, Artem, or good morning to you. Welcome, glad to have you today. Maybe just to get us started, give us a quick elevator pitch on LongeVC. Focus on the size of the fund, your investment focus, the stage of investment you guys do, check size, and how you add value to the portfolio company?

Artem Trotsyuk:Alan, thanks for having me. Super excited for our conversation. I'll give you a quick overview of LongeVC. It's an early stage venture fund focused on life sciences and therapeutics and nontherapeutics, particularly in the longevity ecosystem. We're looking at things that are going to help increase lifespan and health span.

Our fund focuses on late series seed, early Series A investing, and helping folks navigate that bridge between series seed and rounds. Typical check sizes range from as low as 300,000 euros to about a million euros or so. Happy to continue with that, but excited to talk about this a little bit more today.

Alan Wink:I guess, just maybe talk a little bit about the investment activity of LongeVC this year, especially in what appears to be a challenging market. We'll talk more about that later, but what does your investment and exec activity looked like through the first three quarters of 2023?

Artem Trotsyuk:It's good that you brought that up because I think there's been this cloud that has been going around that people have been saying that it's just no one's investing, nothing's happening. The reality is that people are putting in money. Some of that money is being put in as part of helping current portfolio companies filling out their rounds and helping them look to the next stage.

In terms of what we've done in the last quarter or so, we've done roughly three deals, all of them in the early stage life sciences space. Focusing on different aspects of therapeutic intervention. What I'll tell you that has been attractive from an investment landscape is the fact that valuation stabilization has really helped with actually costing, having the company where they are aligned with the cost of the company in terms of where they are with product development.

Yes, people are investing less, perhaps across the board, but the ones who are doing good work are getting money. That's what I've seen across the different funds that we're affiliated with, the different folks that we work with. It is happening, it's just a matter of, I guess, resetting expectations across the ecosystem particularly I'm seeing here on the West Coast.

Alan Wink:Are you typically the only investor in a deal or are you co-invest with other early stage investors? Were the three deals you just did in the last quarter competitive situations, were you competing against others that was causing the valuation to go up at all or were you the only one putting much?

Artem Trotsyuk:Great question. We co-invest with other folks. The most recent one that we did was on natural products that was invest with Artis Ventures as well as Merck. That deal itself, I'd say it was pretty competitive, but more so on the aspect of how do we help this company scale into their next stage. You were asking earlier, what do we do? How do we help companies in the next tranche?

It's important and I think a lot of times when I was starting my career in venture, there's an aspect of picking the right deals. That is true, but then once you invest in a company, the harder part is helping them get to the next stage. I think there's also this aspect of talking about hitting their milestones and going from one stage to the next stage, and making sure that as the valuations are increasing, they're aligned with what development processes are at.

What we really want to help with our portfolio companies, particularly the ones we help, is how do we get you to the next milestone in which you can have a value inflection point such that we can have a tangible output. The companies that we like are ones that are developing products that are going to be going into humans that are going to be actually something that you can tangibly see.

One of our portfolio companies, Melio, is developing a blood testing diagnostic device where they are doing whole blood testing of infection. They have two aspects of it, first, they tell you they'll take a blood sample and typical standard of care for detecting infection is you'll culture that in a petri dish in the lab and then you'll ship that off, and you'll try to actually see whether or not what kind of bacteria or viral strain this is.

That takes time, antibiotics are prescribed, antibiotic over usage is a big problem in the United States. This company, what they're doing instead is we'll take some blood sample, we'll put it on our device. Our device will tell you, do you have an infection? Yes, no. If you do, this is what you have. It's either bacterial or viral.

Then, the doctor will be able to have a faster and more direct to point of care treatment decision that they can make for the patients and then reduce the antibiotic of usage and so forth. With that company, what we're really working towards with our value inflection points is getting them to the point of where they can go from a product to an idea to something that can be put in the clinic to something that can be used.

Where they are now, we're really excited to have them really ramp up and get into the research grade clinical stage and have this product start being tested in different laboratories across the world and particularly within our network of folks who we tie in with. I'd say overall the valuation bubbles were a thing. We all agreed to that, we all know. Everyone can talk about that. People ask has the climate changed?

Is it hard to raise money? Yes, if a startup was an easy thing, then everyone would be doing a startup, right? A startup in itself is inherently a difficult endeavor to begin with. Raising money is always the thing, the hardest part of convincing someone to invest in you. The ones who are making it through right now are the ones who are having a product, are working towards milestones, are cutting costs where they can and they're the persistence of the founders is extreme, I'd say.

Alan Wink:It's funny because when you follow the VC market you see that capital availability certainly is a challenge for founders and entrepreneurs today. Unfortunately, it looks like 2023 is going to be the lowest year in terms of VC dollars invested since probably 2019. Dollars in MedTech deals are staying fairly constant. They're becoming a greater share of total VC dollars.

What do you see going on in the space? The numbers are so dramatic in terms of the decline in dollars invested by the venture capital industry. Where do you see it going? What's going to turn it around do you think?

Artem Trotsyuk:I mean, everyone keeps saying that interest rates, the aspect of interest rates and the Fed having a big play on that in terms of capital allocation. It is a different market to convince an LP to put in money into a fund where their returns can be different or even maybe better in some cases with just an index fund or something along those lines.

The value in where earlier stage venture is more so on what deals we're bringing to the table in terms of what companies we're investing in. Then, the aspect of quality of those companies. In terms of our networks, we're really trying to tap into companies that are building something at an earlier stage to have really reputable science and that are trying to help with our overall mission.

Longevity is a thing that transcends valuation fluctuations and transcends markets that go up and down. People are living longer. As people are living longer, you're going to have more increased costs on the healthcare system, you're going to have more need for new therapeutic intervention and support. Our mission statement stays the same. When it comes to the dollars spent, the money invested, all of that, that just we align with the markets understanding that it's currently harder to raise.

We want to make sure that our portfolio companies are positioned in a way that is going to help them succeed and get to the next stage of their development process. Also, with the new deals that we're putting in and we're putting money in, we want to make sure that they're aligned with actual costs in terms of the valuation targets and where they are on their development pipeline.

For example, a startup that's doing AI for drug discovery who has no asset, no product, or just and not even a data moat, they may have a year ago come and said, "We're a $60 million company invest in us." Nowadays, no, you don't do that because there is nothing to invest in. You have maybe an algorithm, but that algorithm doesn't have a data moat. You might have a product in the future, but that is just a TBD.

Realistically, you're worth that $10 maybe 15 million, you're not a 60 million company. I think the smart founders are realizing that and I've seen that across the board with companies that we're excited about the valuations are in line with where they should be with their product development roadmaps.

Alan Wink:How are you guys looking at valuation, especially since you're doing it such an early stage and when you guys invest in a seed round, what type of equity do you expect to get at that point in time? Has that changed over the last couple of years?

Artem Trotsyuk:It depends. Our fund though, our check sizes are usually in the capacity that because we are early and we are helping, we are co-leading and/or participating in round of maybe a bigger lead is the equity varies from deal to deal. What we're really looking for with every company is having some sort of product market fit so that way the company actually has something which customers are interested in.

Oftentimes, therapeutic companies are coming through and they're discussing that they are in talks with pharma or they're in talks with collaborators. Nowadays, maybe less before it might've been different, but now what we really want is a lot of talking to other people is good, but everyone just talking. What we really look for is something actionable in which you're talking is converted into something more than just talking.

That can tie into an LOI that can tie into some sort of partnership or some sort of collaborative integrative payments in which they're paying you for work spent and so forth. We're also looking for traction. That kind of ties into that aspect of having traction with respect to both your collaborators, but even with if you're a SaaS-based company to have customers and having customer traction as well.

Then, the stage of development where you're at. If you are a pre-seed company, you definitely are an earlier stage of development. Our sweet spot, you have enough preclinical data, you're validated to the point where you are ready to ramp up activity and head into your IND stage and then moving that along. It's a case-by-case basis, but right now a lot more of the work that we've seen in terms of startups, the ones that are fundable are the ones who have more justification to the claims that they are showing or presenting or stating.

Alan Wink:Let me try and change gears here a second. Talk about the LongeVC investment approach.

Artem Trotsyuk:Yeah, sure.

Alan Wink:What are the three things that, or three characteristics that you must see in a company before you invest? On the other side, what turns you off immediately?

Artem Trotsyuk:I'll start with what turns us off. Sometimes, and I've seen this recently and I don't know why this happens, but sometimes when you talk to certain founders, there's an aspect of not having an interest to talk to someone because of maybe a check size for example. I was trained when I was starting in this ecosystem is any money is good money unless you're really, it's very pennies on the dollar or anything, don't take that.

Generally speaking, a good CEO is going to be talking to all investors who may be interested because any money is money. I've seen some companies come through that are like in the, "Oh, we don't really want to talk to you because of certain check sizes and we're looking for $10 to $15 million or 20 million check sizes and if you can't offer that, we don't want to talk to you." I don't think that's an approach any startup person should take, but that's just my personal take on it.

Generally speaking, what we're really looking for is in an earlier stage, we're really looking for the team to have an aspect of if we're working with them particularly, I'll give you an example to answer your question. We made a recent investment in where the team is developing a microbiome platform for mining therapeutics from the enzymes out of the microbiome. They're scientists, they came out of a university spin out.

There was a very clear gap in the need for a business development person on the team for their subsequent rounds in order for them to really scale up into production. What the partners were really looking for was to make sure that the team was coachable, that was one of the biggest things. Not only were they pleasant to interact with, they were responsive.

Responsiveness, coachability, a lot of those people skills that we know are important, but maybe sometimes forget are super important earlier stage investment that really people don't talk about and could be a little bit controversial. I mean, I can tell you here and tell you all about the numbers and all the KPIs and that's all important. I think that's kind of the standard part of the game.

What's more important is the personality because at the end of the day, I have 15 portfolio companies. I'm not working at all 15 companies. The founders working in their own company 24/7, and they're the one who's going to take it through the finish line, not me. I will help them, but they're the ones who are going to really push that through. The aspect of having grit and coachability and having that personality that's open to taking feedback is super important.

Then after that, everything in terms of what I mentioned earlier, product market fit, traction development, and just showing that you have a product. If you're an AI for drug discovery company, you're just like, "Oh, we have an algorithm, we have some data, we mine it, but we have no product coming up in the pipeline anytime in the future." It might be controversial as well, but the reality is that you should have a product in some capacity somewhere in your roadmap.

Otherwise, you are like every other data mining company out there. What's stopping the big guys from doing the same thing that you're doing kind of thing.

Alan Wink:It sounds like you're a firm, it certainly invests in people first. You invest in the jockey and not the horse, even though the horse is important. When you meet with potential portfolio companies, how do you sell LongeVC? What's the value-add that your firm brings to a company?

Artem Trotsyuk:Absolutely. What we're known for is intense diligence, and I don't want to sell that off as my first value-add, but what I've heard as feedback as, because we really get into the nitty gritty of a company, the one we really like, they trust us to know that we are very in tune and aligned with them. The once we've invested in, they understand that we understand them, we understand their business model, and what they're building, so we can add value to what they're doing instead of just having a blanket kind of statement without really understanding the backend per se.

Aside from that, we have a huge investor both investor LP as well as advisory network. A lot of the folks that we collaborate with, we have clinical sites that we can work with or the company that I was mentioning earlier, we're setting up international clinic sites for them to test their product out and doing some blood testing diagnostics in different regional hospital chains in both Europe as well as the Middle East. We're really trying to build into helping companies with tangible transition items they can do particularly as well.

Alan Wink:I guess, no discussion of venture capital investing today would be complete without talking about AI. I saw an interesting quote from Vinod Khosla from Khosla Ventures this morning in the Wall Street Journal. Khosla is actually the first investor in OpenAI, first institutional investor, and he made a comment that he believes AI will be able to do within 10 years, 80% of 80% of the jobs that we know of today. What are you guys looking at in ai in the med tech space, in the healthcare space? What's on your radar screen today?

Artem Trotsyuk:That's a great question. I actually heard a talk by Vinod. He was talking about how their investment in OpenAI went from this. He felt like this was an idea what it's going to be built out, and then he thought he took a chance on it and it paid out really well for him.

Alan Wink:Really, really well, really well.

Artem Trotsyuk:I'd say really, really well. There's an interesting part of that conversation where he was like the aspect of OpenAI going from a nonprofit to a for-profit, and he said something along the lines, "That was just paperwork. That was something that we took care of." Anyway, to your point, the AI waves that we've seen have come and gone before. This is not the first time that people have said that AI will disrupt something.

Radiologists have been saying that they're going to have their life be disrupted. People have said that radiologists are going to go out of business or there's not going to be enough. They're still around, people are still going to school for that. What I'm seeing more of is AI tools will enable work to be done better and more accurate and more efficient.

In the radiology example, supercharged radiologists essentially instead of regular radiologists because they have these tools that are accessible for them to do that. Now, what will happen in a hundred years, maybe there will be no need for that, who knows. What I see now with a lot of the tools and a lot of what people are building is they are just that, they're tools that are empowering people to offload some of the mundane repetitive tasks.

Then, how can we help people supercharge their workforce? If 80% of the workforce will be disrupted, then that 80% will be disrupted in terms of new jobs will be created. Then there's current new within the last year, ChatGPT-enabled jobs like script writing or jobs like prompt engineering. Different types of marketing jobs that came through as a means of using these tools to help people develop content faster.

There's a move now towards having an aspect of AR and VR, and that interaction intersection between that which would create a whole new plethora of jobs to built into those ecosystems. I am on the optimist side of this. Yes, things will get disrupted. Every wave of technology disrupts something. Something will be displaced, but something else will fill that void.

Alan Wink:Are valuations in the AI space within MedTech something that are off the charts right now? Are they realistic or they not?

Artem Trotsyuk:As much as two years ago nowadays, I will be honest, the companies that I've seen in the pipeline, and I think I was looking at stats, I've seen in the last three months, roughly 350 companies or so come through the pipeline. Of those I'd say roughly one third were AI-based in some capacity or another. In terms of an app, something with respect to doing some sort of AI and drug discovery, a de novo version of drug discovery.

Some MedTech enabled smart devices that came through as well. I'll say that valuation extremes are much more rare now because of the understanding of pricing to where the market needs to be in order to get that traction that you would want the investment group to put in for you. What we see on our end, as soon as we see a valuation number that's higher than what we anticipate for that type of company, the internal conversations could be something like, "What's that justification for that valuation?"

Why are they evaluating themselves at $60 million, a hundred million in terms of where they are in their product development? Honestly, I think it's a lot less of a problem now than it was maybe at the beginning of this year.

Alan Wink:It really goes without saying that exits have really been a problem for venture capital funds over the last 18 months. A problem in terms of allowing them to return capital to limited partners, allowing them to get the fund returns. I think we saw an uptick in exits a little bit in the third quarter of 2023, even though it's probably tainted a little bit by the fact that 30% of that exit value was two IPOs.

Do you see the IPO market coming back? It's such an important part of your ecosystem and exits are certainly a necessity for the venture capital fund. What do you see going on in exits in the future?

Artem Trotsyuk:They'll come back. Short answer is there'll be more activity there. Right now, the IPO traction that we've seen and more broadly in the ecosystem I'd say is not so much as companies going public and things reverting back to normal, but more so of companies needing liquidity in going and getting going IPO. Is there a way of getting extra additional capital?

Maybe they're later stage series C, series D company and they need to figure out how to get additional capital in. This could be a strategy to offload some of the debt on their books or offload some of the valuation numbers and reset as well as clear out the cap table. For where we are in terms of the outlook in the future, we do anticipate there'll be an increase.

Biotech in itself is more of M&A market. We see much more M&A activities still happening now. Not in terms of maybe it's a decrease in the overall quantity as compared to maybe a year or two ago, but I still see deals happening. Pharma is still partnering with smart startups. Groups still getting some sort of licensing deals with some sort of acquisitions are still occurring. Going M&A is just as good as going IPO, sometimes even better.

Alan Wink:Do you see one of the reasons for the dormant IPO market being the fact that so many of the companies that went public over the last 18 months are selling in the public markets today at prices way below their IPO prices of recent vintage?

Artem Trotsyuk:Absolutely, even a lot of biotech companies have that same problem and they started and now they're stocks pennies on a dollar. Very much hit the nail on the head there as well.

Alan Wink:I have two final questions.

Artem Trotsyuk:Sure.

Alan Wink:Number one, what gets you excited in MedTech today? What are you guys spending a great deal of time looking at what's going to be the next big winner for LongeVC?

Artem Trotsyuk:Right now, what we're most excited about is a product that is, like I mentioned, Melio is a company that we're really excited about. I think that they have an opportunity to really, it's our portfolio company, so I guess I could talk more about them. I'm really excited about them getting into a product where their FDA cleared so that way they can get into the clinic at a low cost price point.

The company itself has the opportunity to work in third world countries and having this go into clinics in rural communities is really an exciting opportunity, not just to disrupt the aspect of standard of care with diagnostic testing in the clinic, but also ramping it up to areas where you might not have access to a bigger facility.

I think that more global impact is what gets us very excited about the opportunity that this company is going to go in. I can talk about other portfolio companies, but this is the first one that came to mind for me.

Alan Wink:It's funny, I had this great opportunity every quarter to speak to another VC from around the country. It really is a lot of fun, it's really engaging, it's enlightening. I always ask one final question. It's really interesting to get the response. You've been in this business for a while. You've seen hundreds if not thousands of deals.

You've made many investments, you've had some great successes. In all honesty, what's the deal that you wish you had back that you saw early, you passed on for whatever reason it might've been? What's the deal that got away?

Artem Trotsyuk:Great question. There was a company out of California, Acurastem. It was a biotech company that was looking at treatments for neurodegenerative diseases. They entered a licensing agreement with Takeda recently to really ramp up the production of what their therapeutics that they're building and targeting ALS and different conditions in that domain.

We had looked at them about a year ago and we decided to pass because there wasn't a lot of traction. The certain key metrics that we started to look at about a year ago, were not there. We decided there are two at a stage that we're not ready to commit to yet looking back at it, that was a deal that would've made a lot of sense to pursue.

Now, the metric iteration has happened. We're really always looking at improving the outlooks and thinking about what are those next steps that we want to take.

Alan Wink:I think we're coming up against our time. We have a couple of moments left. We're not going to have time to answer audience questions, but I'll certainly get the questions and follow up with people. Artem, I just wanted to thank you for a really great conversation. I think you really gave us an idea where this market is going. Just what do you think the VC market's going to look like next year in terms of dollars invested?

Artem Trotsyuk:I think stabilization, I think we'll have an increase. Short answer is we'll have one. I think the new normal will set in and people will readjust and then I'll continue to go from there.

Alan Wink:I like the optimistic ending. I think it's great for everybody. At this point, Artem, thank you so much. I want to hand it back to Bella.

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Alan Wink

Mr. Wink assists clients with capital budgeting, capital structuring and capital sourcing. He has worked with many tech and life science companies on developing the appropriate capital structure for their position in the business life cycle.

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